Moody's Investors Service, has upgraded the country ceilings for foreign currency bonds, notes, and bank deposit obligations of issuers domiciled in Saudi Arabia to Baa2/Prime-2 from Baa3/Prime-3.

Moody's Investors Service, has upgraded the country ceilings for foreign currency bonds, notes, and bank deposit obligations of issuers domiciled in Saudi Arabia to Baa2/Prime-2 from Baa3/Prime-3.

Lessening of the geopolitical risk stemming from the threat represented by Iraq has facilitated the upgrade, says Moody's.

"In the period prior to the war on Iraq, there was considerable uncertainty concerning the duration and outcome of the war and possible harmful effects on the political and economic stability of countries in the region, including Saudi Arabia. However, following a relatively short and contained war, such concerns have now abated," said Moody's in a statement.

Moody's notes that Saudi Arabia's ratings reflect a high degree of flexibility in the financing of general government debt, despite the fact that this debt has appeared to approach 100% of GDP.

The vast majority of government debt is denominated in Saudi riyals and around 80% of it is held by autonomous government organisations. Moody's recent global refocusing of its debt measurements on debt in the hands of non-government institutions and private individuals brings the government debt ratio down closer to 20% of GDP. These considerations have mitigated Moody's concerns over the size of the debt stock and the ability of the government to roll it over.

According to Moody's, Saudi Arabia is likely to maintain its position as a world leader in oil reserves and production, as well as its strategic political importance in the region.

Concerns over recent terrorist attacks and the withdrawal of US forces from the country do not constitute long-term destabilising factors for the Kingdom, Moody's believes.

The prospects for an internal dialogue that may lead to an improved political environment are likely to have improved. However, many challenges continue to face the Kingdom of Saudi Arabia,constituting limiting factors for further upward movements in the ratings, says the rating agency.

"Policies aimed at stimulating economic growth and creating new jobs have --so far -- not been effective, and unemployment continues to be high with population still growing rapidly," said Moody's.

"Rigidity in the structure of fiscal expenditures and high potential volatility in government revenues stemming from fluctuations in oil prices could result in chronic fiscal deficits. If such fiscal imbalances were coupled with the ongoing need to satisfy all political constituencies, the ability of the government to effectively implement badly needed reforms could be reduced," Moody's concludes.